Fracking will not affect global fuel balance in the immediate future

Fracking or hydraulic fracturing has been raising heated debate among specialists and political analysts since the beginning of its social advertising campaign in 2012. On both sides of the Atlantic environment activists and experts on energy policy are exposing dangerous consequences of this producing method. Recent protests in Britain and Romania against fracking show that political stakes are high. Is shale gas a new bubble or a historic shift on global energy market?

Over the past three years unconventional gas has become a controversial and highly politicized issue. There are two different approaches to this problem. Some believe “shale revolution” may trigger a paradigm shift on global energy market, while others debunk it as a classic example of economic bubble. In our opinion both “frack-heads” and environmentalists tend to exaggerate and are mainly driven by narrow corporate interests. But as it often happens, important issues lie outside the framework of highly polarized debates. The applicability of this technology in real economy should be evaluated according to unbiased expertise, not some partial opinions of public relations specialists in Brussels and Washington. Is it possible to transfer American business model of shale extraction to China and Europe? Can unconventional extraction techniques overcome lack of supply stability?

Today fracking is a costly venture on the U.S. market with dubious prospects in other countries. In the future the situation may change, although not earlier than by the end of the next decade. Till then speaking about any kind of “global transformation” of energy market is nothing, but irresponsible promotion of interest groups behind the ongoing “fracking-saves-the-world” campaign. Shale gas brought down spot prices on the American market and by 2035 it will probably play a significant role in the fuel balance of the USA (about 20%). But it is too early to say that shale gas will definitely gain a foothold in the world market. American producers will have to invest billions of dollars in infrastructure to secure stable exports of unconventional natural gas. These large investments will cause price boost for international consumers.

Moreover, shale gas reserves are reported to be overestimated in China, USA and Poland. The technological process is far more expensive than it is stated in press-releases. “Land grab” business model used for shale extraction can be very risky in times of low spot prices and financial turmoil. The ultimate production volumes are far below original estimates and the wells deplete quicker than expected. Rex Tillerson, the CEO of ExxonMobil said an important thing about shale gas in his talk before the Council on Foreign Relations in New York last year: “We’re making no money. It’s all in the red.” Big players on American shale gas market are taking large writedowns in their reported reserves and selling assets to pay for drilling and production. The quality of both technical and financial information about the real situation in unconventional gas industry is very poor. All these factors combined are bad news for overoptimistic small investors.

In the EU the situation is even more complicated. There have been some 50 experimental wells across Europe and none of them appears to be commercially viable, Guardian reports. France, which possesses the second largest potential for shale gas in Europe, banned shale gas exploration in 2011. Bulgaria, which profits from tourist business, followed France in January 2012. The UK, however, has recently lifted its ban on this technology in order to create an alternative source of energy and limit its dependency on unstable supplies from the Middle East. This radical decision of the Conservatives provoked protests in Great Britain under a sarcastic slogan “Frack off!”. Earlier in 2012 more than 5000 activists tried to challenge pro-fracking policy of Romanian government.

It should be also noted, that actual environmental damage of fracking is deliberately underestimated. The process consumes a lot of water mixed with hazardous chemicals. Injecting toxic fluids under high pressure to fracture the bedrock and release the gas may result in serious groundwater contamination. There are safer methods of fracking, though the industry is far from implementing them in the near future. Though, water and soil pollution seems to be the lesser of two evils. An earthquake measuring 5.6 hit Oklahoma in 2011. The U.S. Army and the U.S. Geological Survey concluded that the practice of hydraulic fracturing caused the seismic activity. Texas, Arkansas and West Virginia are among the states facing earthquake risks now. “The future probably holds a lot more in induced earthquakes as the gas boom expands,” says USGS Earthquake Science Center researcher Art McGarr. Hardly surprising, that the population of some densely populated EU countries does not want to take such risks.

In Eastern Europe many politicians, dreaming about securing hydrocarbon self-sufficiency, hastily presented fracking as a “cure-all technology”. The EU authorities supported their initiative to create a new bargaining tool for the European Commission in talks with Russian energy companies. However, the results are well-known and not very promising. Global market leader “Exxon” and Canadian company “Talisman Energy” dropped all shale plans in Poland and Hungary. Fracking in Poland and neighboring countries turns out to be cost ineffective, even if the West needs it for political reasons. The projects of energy self-sufficiency in these countries should be based on economic feasibility studies, not on aggressive shale production lobbying by radical politicians. It is just too early to draw broad conclusions from all this shale gas hype.

But even if we ignore all environmental concerns, industrial consumers of natural gas in Europe need stability in the first place. Companies that develop reserves of unconventional gas simply lack necessary infrastructure and supply capacity to radically affect international market in the immediate future.